Thursday, January 31, 2008

Doing Business in Iraq & Afghanistan

Guest Blogging  - Professor Christopher W. Behan writes:

In Catch-22, Milo Minderbender started a successful enterprise, the Syndicate, that accomplished extraordinary feats of logistical and financial legerdemain: the Syndicate bought eggs for seven cents apiece and sold them at a profit for five cents apiece, used American military assets to transfer goods and products throughout an entire war theater, and even contracted with the American military to bomb a bridge that the German military was under contract with the Syndicate to defend. An amoral war profiteer, Milo defended his actions by saying, "I just saw a wonderful opportunity to make some profit out of the mission, and I took it. What’s so terrible about that?"

Milo’s Syndicate flourished in an atmosphere of enormous temptation and little oversight. In many respects, military operations in Iraq and Afghanistan offer similar temptations and remarkably, not much oversight at all given the scope of contracting operations. To an unprecedented extent, US forces rely on contractors to provide everything from bullets and beans, to translation services, maintenance, and security. Contractors have billed United States taxpayers enormous amounts of money since the beginning of the war, much of it from cost-plus contracts in which incentives for efficiency (and in some cases, even honesty) do not exist. Individuals and corporations alike have succumbed to the temptation to bribe and accept bribes, double-bill, bill for services not provided, or engage in what might charitably be called "fraud, waste and abuse."

In the past two weeks, the government has taken steps to increase oversight and end contracting abuses. The Army has transferred significant responsibility for contract oversight from the troubled Kuwait contracting office to Rockford, Illinois, Rockford Link Transferring oversight of contract activity to Rockford will permit the Army to use the technical contracting expertise and experience that seems to be in short supply in a deployed environment. According to news reports, the Army took this action after identifying the Kuwait office as a hub of corruption. The Army Criminal Investigation Command (CID) has 87 ongoing criminal investigations related to contract fraud in Iraq, Kuwait and Afghanistan, and 24 individuals have been charged with contract fraud so far. CID has uncovered evidence of more than $15 million in bribes. Those bribes involved military and civilian personnel. An Army officer, Major Gloria Davis, committed suicide after an investigation revealed she had accepted at least $225,000 in bribes; another investigation found that Army Major John Cockerham and his wife and sister accepted up to $9.6 million in bribes for defense contracts. Davis Article

Congress has begun a round of hearings into the matter of contract oversight in Iraq, Kuwait and Afghanistan. Last week, the House Appropriations defense subcommittee released a GAO report that details the Department of Defense’s shortcomings in managing contracting operations in a deployed environment. Those shortcomings include failure to plan, failure to integrate lessons learned, failure to supervise and failure to devote sufficient resources to tackling the problems. GAO Report

Still, the Department of Defense’s failure to properly plan for and supervise contractors provides no excuse for fraudulent behavior. American corporations have a shameful history of placing profits over patriotism during wartime: in past conflicts, American troops have endured rotten food, shoddy uniforms, substandard equipment, defective arms and ammunition and inadequate shelter because of the malfeasance of individuals and corporations. In the current conflicts, the American taxpayer seems to be the chief victim of contracting abuses; it’s as if the Department of Defense is a giant ATM dispensing gobs of free money to whomever will take it. And plenty of corporations and individuals have stepped up to take the money.

On Monday the 28th of January, a federal judge unsealed an indictment against Elie Samir Chidiac, a U.S. citizen, and Raman International Inc. of Cypress, Texas, which does business as Raman Corporation. Samir and Raman are charged with conspiracy to commit bribery and contract fraud with respect to military contracts in Iraq and Kuwait. [Download chiriac_indictment.pdf ] According to the DOJ press release, Chiriac Release An unidentified military contracting officer canceled contracts that were already awarded to, and often had been performed by, third-party contractors;

  • The unidentified military contracting officer re-awarded those contracts to Raman and fraudulently verified that Raman had performed the requisite service or delivered the requisite goods;
  • Chidiac and the unidentified military contracting officer forged various contracting documents and fraudulently modified the military contracting database in order to create the appearance of propriety with respect to these canceled and re-awarded contracts;
  • The unidentified military contracting officer authorized Chidiac to receive cash payment on those contracts, which Chidiac did, despite the fact that neither Chidiac nor Raman performed any work, provided any service, or delivered any good with respect to these contracts; 
  • Upon receipt of cash payment from the United States, typically in U.S. $100 bills, Chidiac remitted a portion of the money back to the unidentified military contracting officer, often delivering the money to the officer at Raman’s compound, adjacent to Camp Victory; and
  • The unidentified military contracting officer sent money received from Chidiac via U.S. Postal Service to a family member in Midwest City, Okla.

All of these allegations, if true, are disturbing. They illustrate the harm that can arise from greed and a lack of oversight on the part of the government. One hopes that a combination of increased congressional oversight, improved Army and DoD accountability, and an active justice system will help stem the tide of modern-day war profiteers doing business in Iraq and Afghanistan.

January 31, 2008 in Government Reports, Prosecutions | Permalink | Comments (9) | TrackBack (0)

Is the Government Going Soft in the Lerach Sentencing

It isn't every day that federal prosecutors point to the collateral consequences of a white collar defendant's guilty plea as a reason to impose a lighter sentence, but that seems to be what happened in the recommended sentence for leading plaintiffs lawyer William Lerach.  The government's sentencing memorandum, available below, tries to walk a fine line between advocating for a higher sentence than  the one recommended by the Probation Office while still adhering to the plea agreement that capped Lerach's potential prison term at twenty-four months for his role in making secret payments to representative plaintiffs in cases litigated by his former firm, Milberg Weiss.  So in the same filing prosecutors asked for a higher Sentencing Guidelines calculation to trigger the maximum twenty-four month sentence, nine months longer than recommended in the Presentence Report.  Then in defending the decision to limit the potential punishment to a maximum of two years, the government states:

Defendant, who will be sixty-two years old upon commencement of his sentence, now stands in disgrace before the profession of which he considered himself a national leader, and the courts before which defendant practiced. Given what is surely an ignominious conclusion to an otherwise successful career, a period of incarceration greater than twenty-four months is not necessary to promote the sentencing goals set forth in Section 3553(a).

While that position is nothing new in argument by defense lawyers on behalf of their clients, I don't recall seeing prosecutors point to the reputational effects of a guilty plea as a justification for a sentence lower than the one called for in the Guidelines. 

In Lerach's case, it is an odd argument because his reputation was built at least in part on the very conduct involved in the prosecution.  In a different section of the brief seeking a higher sentence, albeit still within the twenty-four month limit, the government asserts that "[t]he conduct at issue amounted to a systematic effort to obstruct and undermine the lawful functioning of the judicial system in hundreds of lawsuits brought in federal and state courts throughout the United States."  So Lerach attacked the heart of the legal system, while the "ignominious conclusion" of his career argues in favor of some measure of leniency.  Part of his prominence in the profession likely contributed to his ability to pursue class action lawsuits while making the secret payments, so the loss of prestige is not just a tangential result of his crime.  I almost get the feeling that portraying Lerach's fall from grace as a justification for a lighter sentence is a bit like the person convicted of setting fire to his home for the insurance money begging for mercy because he's now homeless -- this isn't so much a "collateral consequence" as a direct result of one's choice to commit a crime.

So, have prosecutors gone soft?  The language arguing for a more limited sentence is sure to be used in other white collar cases in which a defendant suffers from collateral personal and career consequences as a result of a guilty plea or conviction.  It may be that prosecutors have to take this almost schizophrenic approach because the plea agreement ended up being potentially too favorable to the second most powerful lawyer at Milberg Weiss, which itself is under indictment.  You learn to live with your deals, but the rhetoric used in defending this one could come back to haunt prosecutors later on. (ph)

Download us_v_lerach_government_sentencing_memorandum_jan_28_2008.pdf

January 31, 2008 in Legal Ethics, Sentencing | Permalink | Comments (0) | TrackBack (0)

Yet Another Difference With the French

The Wall Street Jrl (here) points out yet another difference between the French and the United States when discussing the support the CEO received from the board of directors at Societe Generale. Prior differences were discussed here and here. In the United States, the board might be very reluctant to back a company head or individuals within a company when there is a potential investigation or potential civil or criminal liability.  With deferred and non-prosecution agreements, companies often leave the individuals at risk and without support, as the entity becomes the sole focus in saving the company from the devastating effect of a possible prosecution.  So far, it appears that in France the decision is to support the CEO, at least in this case. Will a difference like this move more companies into operating abroad?


January 31, 2008 in International, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 30, 2008

Proposed Legislation on Deferred Prosecution Agreements

One need only look at Carrie Johnson's Washington Post article of today to realize the importance of deferred prosecution agreements and the controversy on the appointment of monitors. The article focuses on how Attorney General Mukasey, prior to his approval as AG, had been a finalist for such an appointment. In the background is legislation proposed by Rep. Frank Pallone (D-NJ) which would provide transparency and oversight on some of the existing DOJ practices with respect to deferred prosecution agreements.  It reads as follows:


2d Session H. R. 5086

To require the Attorney General to issue guidelines delineating when to enter into deferred prosecution agreements, to require judicial sanction of deferred prosecution agreements, and to provide for Federal monitors to oversee deferred prosecution agreements.

IN THE HOUSE OF REPRESENTATIVES January 22, 2008 Mr. PALLONE introduced the following bill; which was referred to the Committee on the Judiciary A BILL To require the Attorney General to issue guidelines delineating when to enter into deferred prosecution agreements, to require judicial sanction of deferred prosecution agreements, and to provide for Federal monitors to oversee deferred prosecution agreements.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,


(a) In General- The Attorney General shall issue guidelines delineating when United States attorneys should enter into deferred prosecution agreements, including appropriate factors for United States attorneys to consider in determining whether to enter such agreements as described in subsection (b).

(b) Appropriate Factors for Consideration- Appropriate factors for consideration in the determination of whether to enter into a deferred prosecution agreement include--

(1) the potential harm of entering into a deferred prosecution agreement to employees, shareholders, and other stakeholders of the corporation that is to enter into the deferred prosecution agreement who are not potential parties to litigation relative to the corporate wrongdoing;

(2) the degree of cooperation by a corporation that is to enter into a deferred prosecution agreement with investigators including the corporation's willingness to provide documents and make available for questioning employees, officers, and directors of the corporation;

(3) remedial action taken by the corporation that is to enter into a deferred prosecution agreement in response to wrongdoing such as internal investigation, dismissal of employees, acknowledgment of wrongdoing, payment of restitution, and other structural, management, and policy changes;

(4) availability of criminal charges against specific employees who may have engaged in illegal acts relative to the corporate wrongdoing; and

(5) availability of sufficient alternative punishments or remedial actions pursuant to a deferred prosecution agreement.


(a) In General- A deferred prosecution agreement shall be approved by a United States district court judge or a United States magistrate judge in the United States district court where criminal charges would be prosecuted by a United States attorney.

(b) Submission of Deferred Prosecution Agreement- A deferred prosecution agreement shall be submitted to the appropriate United States district court where criminal charges would be prosecuted by a United States attorney to receive judicial sanction.

(c) Judicial Review and Sanction- A United States district court judge or a United States magistrate judge shall review the terms of a deferred prosecution agreement to ensure that the agreement comports with public interest and all applicable laws and legal precedent before authorizing the deferred prosecution agreement to be entered into by the parties.


(a) In General- A Federal monitor shall oversee a deferred prosecution agreement.

(b) Appointment of Federal Monitors- A Federal monitor shall be appointed by an independent third party (a United States district court judge or a United States magistrate judge) from a pool of pre-qualified firms or individuals (or both).

(c) Qualifications of Federal Monitors- A Federal monitor shall have experience in criminal and civil litigation.

(d) Payment of Federal Monitors- A Federal monitor shall be paid according to a pre-determined fee schedule set by the United States district court.

(e) Report Requirement in Deferred Prosecution Agreement-

(1) A deferred prosecution agreement shall include a requirement that a Federal monitor submit reports to the United States attorney and to the United States district court.

(2) A deferred prosecution agreement shall include the number and frequency of reports required by a Federal monitor.

SEC. 4. BREACH OF DEFERRED PROSECUTION AGREEMENTS. Upon request from a United States attorney, the presiding judge in the district court where a deferred prosecution agreement was approved shall determine if the deferred prosecution agreement has been breached.

(esp) (w/ a hat tip to Stephanie Martz)

January 30, 2008 in Deferred Prosecution Agreements | Permalink | Comments (1) | TrackBack (0)

Wesley Snipes Trial: Rolling the Dice

The Wesley Snipes tax trial is moving very quickly as the defense decided to rest without calling any witnesses (see here and here). The celebrities mentioned earlier did not appear on the witness stand. The pros and cons of offering no evidence, and Snipes not testifying, are discussed here. And although a jury is clearly instructed that the defense does not have to prove anything, one often wonders if the jury will follow this mandate. The defense resting moved the case quickly into closing arguments (see here and here). 

There are many levels to this trial.  On the surface we see the courtroom battle with many years without tax returns, but also a question as to why he may not have filed them.  Was it a conspiracy or was there a legitimate question?  We also see a case in closing arguments while outside the courthouse an election is occuring.  And finally we see an all-white jury coming from an all-white venire deciding the guilt or innocence of Snipes.


January 30, 2008 in Celebrities, Tax | Permalink | Comments (0) | TrackBack (0)

Comverse Comes Clean on Kobi, and He Countclaims for $72 Million

Comverse Technology issued the final report (here) on its internal investigation of options backdating and earnings manipulation, blaming the misconduct squarely on its founder and former CEO, Kobi Alexander, and other senior executives.  In 2006, Alexander fled -- or chose to relocate -- to Namibia shortly before his indictment in the Eastern District of New York on conspiracy, securities fraud, and obstruction of justice charges.  According to the company's report:

In reviewing the Company's practices relating to option grants from 1991 through 2005, the Special Committee reviewed 39 separate grants of more than 82 million options to approximately 6,200 employees and consultants, as well as 22 grants of approximately 1.2 million options to eight non-employee directors of the Company. It found that between 1991 and 2001, almost 54 million stock options (issued via 29 grants to 5,386 grantees) were backdated to obtain advantageous exercise prices, with the knowledge and participation of the Company's former Chairman and Chief Executive Officer, Jacob "Kobi" Alexander ("Alexander"), the Company's former director and General Counsel, William Sorin ("Sorin") and, at times, the Company's former Executive Vice President and Chief Financial Officer, David Kreinberg ("Kreinberg"). 

Kreinberg and Sorin earlier entered guilty pleas and settled securities fraud cases filed by the SEC.  The accounting improprieties involved "cookie jar" reserves used to smooth out Comverse's earnings so that they appeared to be less volatile than they were, a major no-no in financial reporting.

Alexander has been living in Windhoek, Namibia's capital, for over eighteen months, and an extradition request by the United States has been repeatedly postponed by the Namibian courts at his request; the next one is scheduled to take place in March, although given past practices it too is likely to be delayed.  One would think Alexander would not want to pick a fight with his former employer in the United States, even after it filed a lawsuit against him in New York state court to recover for the damages he allegedly caused it through the options backdating and accounting problems.  Instead, however, he filed a counter-claim to Comverse's suit, seeking $72 million in severance pay and for options that he claims the company improperly canceled.  Given that the Super Bowl is almost upon us, perhaps this is the "best defense is a good offense" approach.

If one were trying to stay away from the United States, would you file a claim in a state court lawsuit that might subject you to the jurisdiction of an American court and require you to appear for a deposition?  New York's civil discovery provision, CPLR 3110, provides: "Where the deposition is to be taken within the state. A deposition within the state on notice shall be taken: 1. when the person to be examined is a party or an officer, director, member or employee of a party, within the county in which he resides or has an office for the regular transaction of business in person or where the action is pending . . . ."  A party can seek to have a deposition taken outside the state, but it requires a showing of "substantial hardship" in order to avoid appearing in New York. 

Is a federal indictment a "substantial hardship" that might be grounds for Alexander to avoid returning to New York?  I'm certainly not an expert in New York civil procedure, but the few cases I saw on the topic allowing depositions outside the state generally involved issues related to illness or infirmities, or where the person would appear at a time closer to the trial so initial discovery could be taken through written interrogatories or video deposition.  Somehow, I suspect a New York state Supreme Court judge is not going to view a claim that a party wishes to avoid being arrested on federal charges -- even when that person proclaims his innocence -- as meeting the requisite standard to avoid appearing for a deposition, particularly when a counter-claim has been filed.  Even if Alexander is deposed in Windhoek, don't be surprised if the federal prosecutors get ahold of the transcript to use in his trial -- if there ever is one, givenn how well his attorneys are delaying the extradition process in Namibia.  Comverse doesn't appear to harbor any warm feelings for its former CEO these days, so it will look to make the case against him almost as much as the U.S. Attorney's Office will.  A Reuters story (here) discusses Alexander's counterclaim. (ph)

January 30, 2008 in Civil Litigation, Securities | Permalink | Comments (2) | TrackBack (0)

Tuesday, January 29, 2008

Sigue Enters Deferred Prosecution Agreement

As anticipated here, the DOJ has announced in a press release that "Sigue Corporation and Sigue, LLC (“Sigue”), San Fernando, California-based money service businesses, entered into a deferred prosecution agreement on charges of failing to maintain an effective anti-money laundering program and will forfeit $15 million to the U.S. government."  In addition the "Financial Crimes Enforcement Network (FinCEN) announced the assessment of a civil money penalty in the amount of $12 million against Sigue Corporation and Sigue, LLC, . . . . for violations of the Bank Secrecy Act (BSA). Sigue, without admitting or denying the allegations, consented to the civil money penalty." (see here)

The DOJ reports that the Information was filed in the Eastern District of Missouri and that it "charges Sigue with one count of failing to maintain an effective anti-money laundering program."  The press release states that

"The company will pay $15 million to the United States, representing funds that are subject to forfeiture as a result of the criminal charge, and has agreed to commit an additional $9.7 million to improving its anti-money laundering program. In light of Sigue’s remedial actions to date and its willingness to accept responsibility for its anti-money laundering failures, the government will recommend the dismissal of the charge in 12 months, provided the company fully implements the significant anti-money laundering and Bank Secrecy Act measures required by the agreement, and complies in all other respects with the terms of the agreement."

The requirements placed by the government on those doing money transfers in the United States is highlighted in this passage of the DOJ press release -

"The charges filed today arose out of transactions conducted by Sigue and its authorized agents from November 2003 through March 2005. Sigue operates by and through more than 7,000 money remitter agents across the country. During this time, more than $24.7 million in suspicious transactions were conducted through registered agents of Sigue, including transactions conducted by undercover U.S. law enforcement agents using funds represented to be proceeds of drug trafficking.  Sigue filed suspicious activity reports (SARS) on the obviously structured transactions, but ultimately failed to identify the broader patterns of money laundering activity and prevent the unlawful activity from continuing. Sigue failed to create systems and procedures to identify suspicious financial transactions being conducted by related senders and beneficiaries, from the same or multiple remitter agent locations on the same day, or over several days, months, and, in some cases, years."

The agreement makes it very clear that companies, like Sigue, who are in the business of handling money transfers will pay dearly if they fail to implement systems that will assist the government in monitoring monetary transfer activities.  One can anticipate a strong corporate compliance program being used at Sigue.   


January 29, 2008 in Deferred Prosecution Agreements | Permalink | Comments (0) | TrackBack (0)

Monday, January 28, 2008

The French Do It Differently

The media has been covering the French financial trader who is accused of trades resulting in significant losses. Co-blogger Peter Henning points out some contrasts with the U.S. system (see here).  Here are more to consider:

  • What is fascinating is that the focus of the blame is not always on the individual accused of wrongdoing.  Rather, the Societe Generale is receiving media jabs as questions arise about their oversight.  If DOJ were investigating this case would they have given a non-prosecution or deferred prosecution agreement to the company in return for providing the case against the individual?
  • If this were the U.S., would other companies/banks be considering buying the company out as is reported by the N.Y.Times as a possibility (see here)?  Or would fear of DOJ prosecutions preclude such a market resolution?
  • Another difference is that there is discussion as to the motivation, or in this case the lack of monetary motivation of the individual charged here. In the United States, loss would be the driver of the train and there would be no stopping the engines once significant losses were determined.  The motive of the accused plays a part in some cases, but there are many that overlook this consideration.  The cold sentencing guidelines of the U.S. seldom offer relief in a system that examines whether the crime occurred and the amount of loss incurred.
  • Finally, John Ward Anderson at the Washington Post notes that if convicted, the accused individual could face up to seven years in prison, in addition to a fine.  As one might suspect, if the losses measure the amounts anticipated and reported in newspapers, if this individual had been charged in the United States, he would be facing a devastating penalty if convicted -- just ask Jeff Skilling and Bernie Ebbers.

In looking at all of these differences, one has to realize that when the U.S. Sentencing Commission considered uniformity, it doesn't look like they went beyond the boundaries of this country. In a "flat world" perhaps it is important to start noticing these differences.


January 28, 2008 in Prosecutions, Sentencing | Permalink | Comments (0) | TrackBack (0)

Political Liabilities

A front page political candidate can be just one of the many feeling the collateral consequences of a criminal indictment, or in this case a bond revocation. Presidential hopeful Barack Obama is feeling the sting of being associated with someone accused of criminal conduct. The NYTimes headline is One Time Obama Donor is Ordered Jailed; the Wall Street Jrl calls it Obama Supporter is Jailed, and the Chicago Tribune offers a less offensive title for the candidate in Bond For Tony Rezko Revoked, but then goes on to say how the more than $80,000 donated to the Obama campaign by the charged individual had been given to charity. Apparently prosecutors were concerned when a wire transfer from "Lebanon and Luxembourg"was used to pay off individuals who had assisted with the bond money  for the accused individual. A key issue on whether to allow bond pending trial is whether the accused would flee. This alleged wire payment raised questions concerning flight, and the judge therefore acted to minimize the risk. Unfortunately for Senator Obama, it happened to be someone who had contributed to his campaign. Now the question will be - why did this individual give so much money in political campaign contributions.


January 28, 2008 in News | Permalink | Comments (0) | TrackBack (0)


Professors Doug Berman and Mark Osler have been blogging on law profs writing amici briefs, with discussion of the pros, cons, and the experience it can offer (see here).  But the Ohio State Criminal L.J. has a new fora for amici views (here), that debuts with a cast of incredible authors writing on the topic of sentencing.  It states:

The Ohio State Journal of Criminal Law is very pleased to introduce OSJCL Amici: Views from the Field, a first-of-its-kind, online resource for timely and critical commentaries on the cutting edge of criminal law. Our hope in creating this resource is to help bridge the divide between the academy and the practicing community by creating a venue for leading practitioners to engage with academics, students, the public, and others in the criminal law field.

The U.S. Supreme Court’s recent sentencing decisions in Gall v. United States and Kimbrough v. United States provide the focal point for our first four commentaries, all written by federal district court judges and published for the first time here.

Check out the Sentencing Law & Policy Blog here.


January 28, 2008 in Sentencing | Permalink | Comments (0) | TrackBack (0)

Wesley Snipes: What to Expect This Week

The prosecution rested in the Wesley Snipes case with a prosecution tax witness making the final statement to the jury. (See Orlando Sentinel AP here and Stephen Hudak here and here).  Rick Cundiff at reports on discovery issues regarding one of the prosecution witnesses. And the star, Snipes, seems to be getting a crowd for the show (see here).  There is even a blog devoted to following the trial (here).

Next week is defense week, although the defense does not have to present any witnesses or do anything for that matter. A defendant in a criminal case is presumed innocent and the burden never shifts to the defense on the crucial issue of whether the accused is guilty of the crimes charged. The initial list of witesses included many a celebrity (e.g. Sylvester Stallone), but whether that will happen is an unknown, just as having Snipes testify is uncertain. Here are some pros and cons of having Snipes take the stand -

Cons -

  • There are a lot of years without tax returns to explain away.
  • It provides an opportunity for the government to increase the amount of potentially damaging evidence as Snipes would be required to answer questions posed to him.

Pros -

  • Unlike so many witnesses, he has experience speaking to a crowd.
  • It would give him a chance to provide the jury with an explanation of his lack of intent - a crucial hurdle faced by the prosecution.

It could be a long or very short week, depending on what the defense decides to do here.


January 28, 2008 in Celebrities, Prosecutions, Tax | Permalink | Comments (1) | TrackBack (0)

Saturday, January 26, 2008

Technology Does It Again - The Mayor of Detroit

This time the technology provides text messages that prove problematic to the Mayor of Detroit. The messages relate to his relationship with a member of his staff. But what may be even more devastating is that a prosecutor is now investigating whether these messages prove prior lying that may have been under oath. (NYTimes here; AP here)  The Detroit Free Press has extensive press here including some of the text messages between the mayor and this member of his staff. And you have a prosecutor promising a full investigation (see here).  One has to wonder if the "shaming" punishment has already occurred in this case.


January 26, 2008 in Investigations | Permalink | Comments (0) | TrackBack (0)

Responding to the Massive Fraud at Société Générale -- A Study in Contrasts

Legal cultures respond differently to reports of wrongdoing, and the disclosure of the massive fraud in France perpetrated by a "rogue trader" identified as Jérôme Kerviel shows how different things can be.  One of France's oldest banks, Société Générale was chartered in 1864 by Napoleon III and is now the country's second largest publicly traded financial institution, well-known for its extensive and heretofore sophisticated derivatives trading operation.  The controls on the trading desk were somehow circumvented by Kerviel, described as a mid-level trader, whose transactions in European stock index options and futures totaled as much as €40 billion and ended up down over €2 billion when discovered on January 19.  Société Générale secretly began to unwind the trades over three days beginning on Monday, January 21, in the midst of a market meltdown that may have been exacerbated by its transactions.  The sales triggered even greater losses for the bank, with the total estimated at €4.9 billion, or about $7.2 billion, from Kerviel's investments.  This surely ranks among the largest financial frauds ever, and raises serious concerns about Société Générale's internal controls -- how do you not notice positions as large as €40 billion in your portfolio, even if computer programs to flag these types of risk were circumvented?

The interesting point is not so much the size of the losses, but the response of the bank and French authorities, in contrast to how U.S. regulators and prosecutors would have acted when informed of similar conduct.  As an initial matter, it appears that Société Générale informed very few officials in the French government of the problem.  While the governor of the Banque de France, Christian Noyer, was kept abreast of the issues, upper levels of the French government did not learn of the problem until the day before its disclosure (see Bloomberg story here).  Meanwhile, Société Générale tried to get out of the investments without making any disclosure to protect itself from even greater losses, which could be viewed as favoritism by the Banque de France.  I suspect that a U.S. bank could not get away with disclosing such problems to only one banking regulator, such as the Comptroller of the Currency or the Federal Reserve, while keeping the rest of the government in the dark about transactions involving this type of misconduct.  When the news emerged, neither Société Générale nor the Banque de France issued any statement, or at least there's nothing on either's website discussing Kerviel's fraud (see here and here).  It is hard to imagine federal regulators not taking the lead on such an issue to explain how the government will respond.

The biggest question, however, is where are the prosecutors?  The French system is obviously quite different in its approach to criminal investigations, with magistrates conducting investigations.  But according to news reports (see Bloomberg here), Kerviel is "on the run" and not in custody, seemingly having slipped away.  Société Générale interviewed him on January 19 to figure out what he had done, and Kerviel was around at least in the early part of this week.  In the United States, there is no doubt that a trader accused of such conduct would have been in custody the moment the government learned of the fraud.  Indeed, the banking regulators would likely have contacted prosecutors before doing anything on the case, assuming they found out first, and not kept the Department of Justice in the dark.  Kerviel's motive for engaging in the transactions is unknown at this point, and it does not appear he was an embezzler or somehow sent the money abroad, at least to this point.  His disappearance, however, raises questions about the handling of the case, and I suspect the French authorities hope he does not show up in Namibia or a like jurisdiction. (ph)


UPDATE: An AP story (here) states that Kerviel is now in custody as part of the criminal investigation of his trading. (ph)

January 26, 2008 in Fraud, International | Permalink | Comments (0) | TrackBack (0)

Friday, January 25, 2008

Collateral Consequences?

HealthSouth was often in the news during the trials of former company CEO Richard Scrushy.  One trial ended with not-guilty verdicts, while the other found Scrushy guilty of charges of mail fraud, conspiracy, and bribery. (see here).  But whenever a CEO of a company like HealthSouth is facing charges, there are likely to be repercussions felt by many outside the sphere of the individual. It is therefore interesting to now see that HealthSouth is selling some Birmingham, Alabama property to a developer.  The Birmingham News speaks about this sale. (see here). Whether this is a collateral consequence of this investigation, however, is unknown.

(esp) (w/ a thank you to the person who called, and an apology for not being able to talk)

January 25, 2008 in HealthSouth | Permalink | Comments (0) | TrackBack (0)

Deferred Prosecution Agreement for Former Monster Worldwide CEO

Former Monster Worldwide CEO Andrew McKelvey entered into a deferred prosecution agreement with the U.S. Attorney's Office for the Southern District of New York (available below) related to options backdating at the company.  This is the second such deferral agreement involving an individual in a white collar crime case that I'm aware of, the other one involving former investment banker Frank Quattrone to settle obstruction of justice charges.  While the Department of Justice has entered into these agreements with corporations with increased regularity, they are uncommon for individuals, with both coming from the same office and each involving special circumstances.  For Quattrone, the government would have had to try him a third time, after the first proceeding ended with a hung jury and the conviction after the second trial reversed due to improper jury instructions -- and the case would be transferred to a new judge because of a perception of possible bias by the judge in the first two trials. 

The reason given for the DPA with McKelvey is that he is suffering from a terminal medical condition, so that it would be unlikely a trial could take place on the charges, and even if there was a conviction it would be unlikely to survive under the abatement doctrine applied in federal cases.  The DPA essentially requires McKelvey to obey the law for twelve months and restrict his travel.  He acknowledged his involvement in backdating options at Monster Worldwide from 1997 to 2003, and the company's former general counsel earlier entered a guilty plea to charges related to the backdating and was cooperating in the investigation.  A U.S. Attorney's Office press release (here) discusses the DPA, and the SEC also entered into a settlement with McKelvey that requires him to disgorge profits of $275,000 but does not impose a civil penalty due to his illness (see SEC Litigation Release here). 

The disposition in this case appears to be based on the unique situation of the defendant, and does not seem to signal a trend toward using DPAs to resolve cases involving individuals involved in corporate misconduct.  I suspect, however, that defense lawyers may try to push for such dispositions in the future for individual clients in addition to corporations, and it will be interesting to see if these agreements become more common. (ph)

Download mckelvey_deferred_prosecution_agreement.pdf

January 25, 2008 in Deferred Prosecution Agreements, Prosecutions, Securities | Permalink | Comments (0) | TrackBack (0)

Thursday, January 24, 2008

Onto the Amici Briefs in the KPMG case

After a long list of briefs by many of the individuals in the KPMG related matter, things are now turning to the briefs of the amici.  We have three to report on here:

1) Brief of Amici Former Attorney General and U.S. Attorneys in Support of Affirmance.

Clearly this is an extremely strong brief.   Having Walter Dellinger as counsel of record and names like --Dick Thornburgh, Edwin Meese III, William Weld, and Stuart Gerson -- as some of the amici, certainly doesn't hurt.  This brief is also powerful in its content.  A sampling of the brief can be seen in this passage below:

"First, based on their experience in the Department, amici believe the prosecutors’ conduct in this case, in addition to violating the Fifth and Sixth Amendments of the Constitution, was inconsistent with the high standards of conduct that should be expected of lawyers at the DOJ. Department lawyers of course should not use tactics that deprive defendants of their constitutional rights. Nor should they seek to gain litigation advantage by attempting to undermine a defendant’s legal representation."

The amici show their disagreement with DOJ's tactic here:

"the tactics at issue in this case, in addition to being inappropriate, are wholly unnecessary to the prosecution of corporate crime."

See Brief here -

Download 20080123_former_ag_amici_brief_tj252.pdf

2) Brief of the Washington Legal Foundation.

If anyone had any question as to whether an alleged error here might have been harmless, they need only read this brief. The brief advocates for the dismissal granted in this case.

See Brief here -

Download 20080123_wlf_amicus_brief_tj252.pdf

3) Brief of the Securities Industry & Financial Markets Association -

This brief was submitted "to address the principles supporting the common practice of companies advancing attorneys' fees to their officers, directors, and employees."

See Brief here -

Download 073042cr_usa_v. Stein, et.pdf


January 24, 2008 in KPMG | Permalink | Comments (1) | TrackBack (0)


Bonds Moves to Dismiss the Indictment

Home run king Barry Bonds moved to dismiss the perjury and obstruction of justice indictment (brief available below), asserting that the charges are duplicitous -- one of my all-time favorite legal arguments -- and that the questions posed were so ambiguous that his answers were not false as a matter of law.  A count of an indictment is duplicitous when it charges two crimes in a single charge, which is to be distinguished from multiplicity, which is charging the same crime in two different charges.  The more common duplicity claim involves two separate crimes charged in one count, but here the claim is that there are different responses that may be untruthful, so that the government has too many potential instances of perjury in each count. 

The four perjury counts contain a number of questions and answers, so it is difficult to identify any one with particularity that is perjurious.  The problem posed by a duplicitous charge is that there is no way for a jury to convict on one offense and acquit on another offense contained in the same count.  Similarly, because the jurors have two crimes to consider in a single count, they may convict without reaching a unanimous agreement on either.  For example, if some jurors believe one response by Bonds was untruthful while others believed a second response in the same count was a lie, then they could all agree that he committed perjury but not based on the same answers.  The problem a defendant faces when there is duplicity in the charges is that it's not clear which of the statements the prosecution will focus on, and indeed the government could shift its theory in response to the defense.

While Bonds raises a valid point about the number of questions and answers in each count, in the government's defense I suspect prosecutors wanted to provide the context for his answers, many of which are fairly clear denials (i,e. "no" in some instances).  Moreover, even if the district court found that the perjury counts were duplicitous, the remedy is usually not dismissal but an order to the government to seek a superseding indictment from the grand jury that cleans up the charges or perhaps a bill of particulars to identify one specific answer in each count that it will prove as perjury.  It may be that the government will seek more charges by breaking up the counts, so that rather than facing four counts of perjury, Bonds will face eight or twelve.  The motion also attacks the obstruction charge on essentially the same ground.

Bonds' second argument goes to the heart of a perjury charge -- the ambiguity in the questions means that he did not answer the questions untruthfully, or at least did not know his answers were false.  The key perjury case is Bronston v. United States, 409 U.S. 352 (1973), in which the Supreme Court held that "the perjury statute is not to be loosely construed, nor the statute invoked simply because a wily witness succeeds in derailing the questioner-so long as the witness speaks the literal truth. The burden is on the questioner to pin the witness down to the specific object to the questioner's inquiry."  If the questions are ambiguous and the prosecutor does not ask a clear question or seek to clarify the answer, then the defendant cannot be convicted for the responses.  Thus, compound questions, and questions using broad terms or imprecise dates, can open the door to a "not guilty" verdict.  The problem for Bonds is that the ambiguity defense is usually one left to the jury, and it is the rare case in which a court decides as a matter of law that the questions were so defective that no rational jury could find the answer was untruthful.  While this gives us a preview of where the defense is headed at trial, it is unlikely to succeed at this stage of the proceedings.

As often happens when a sports figure is involved in a case, the temptation is to toss in an analogy (or perhaps a simile) to the athlete's sport is just too hard to resist, even if it only causes the reader to groan.  In the brief, the attorneys write with regard to the duplicity in the indictment, "Even Barry Bonds cannot be expected to make contact with a fastball, slider, and knuckler thrown him simultaneously."  Please, no one this side of Tim Wakefield throws a knuckle ball any more, and the best sucker pitch in baseball is the splitter.  Let's hope the government does not respond by likening the defense filing to the typical defensive shift put on when Bonds comes to bat. (ph)

Download us_v_bonds_motion_to_dismiss_jan_23_2008.pdf

January 24, 2008 in Obstruction, Perjury | Permalink | Comments (0) | TrackBack (0)

An Invitation That's Not Really an Invitation

in·vi·ta·tion (nv-tshn):

  1. The act of inviting.
  2. A spoken or written request for someone's presence or participation.

I've always taken the word "invitation" to mean something that a person can turn down, but apparently that's not the case when it comes from a Congressional Committee.  The House Oversight and Government Reform Committee asked three former New York Yankees, Roger Clemens, Andy Pettitte, and Chuck Knoblauch, along with two admitted steroids suppliers, Brian McNamee and Kirk Radomski, to testify about steroid use, but Knoblauch didn't respond to the "invitation."  Aside from a brief appearance before reporters outside his Houston home to assert his ignorance about the issue, Knoblauch has not been heard from.  He will have to respond now, however, because the Committee announced (here) that it would issue a subpoena to him: "The Committee has taken this step because Mr. Knoblauch failed to respond to the invitation to participate voluntarily in a deposition or transcribed interview and the February 13 hearing."  How Knoblauch responds to the more compelling subpoena remains to be seen, but at least it's clear that an "invitation" is not something one is free to ignore when the envelope comes from Congress. (ph)

January 24, 2008 in Congress, Investigations | Permalink | Comments (1) | TrackBack (0)

Could Scruggs Lose His Tobacco Settlement Fees?

A reader sent a question asking whether, in light of all the bribery allegations leveled against famed plaintiffs lawyer Dickie Scruggs, the government could seek to forfeit the reputed $1 billion fee he received for his role in the state tobacco litigation that resulted in a $248 billion settlement.  We certainly aim to please here at the White Collar Crime Prof blog, so I will give a shot at answering it.  Forfeiture involves the government taking the "proceeds" of criminal activity, and the current charges against Scruggs do not involve the tobacco settlement or his fees from those cases.  The bribery allegations have involved disputes over attorney's fees, but not regarding the disposition of the underlying litigation.  The current indictment of Scruggs and two other remaining defendants does not contain a forfeiture count, and the alleged offense is an attempted bribe, so there are no proceeds of the criminal activity.  The civil asset forfeiture statute, 18 U.S.C. Sec. 981(a)(2)(A), defines proceeds as "property of any kind obtained directly or indirectly, as the result of the commission of the offense giving rise to forfeiture, and any property traceable thereto, and is not limited to the net gain or profit realized from the offense."  While the Sec. 666 charges against Scruggs can trigger forfeiture, they do not allow the government to seek assets that are not generated by the violation, or substitute assets if it is a criminal forfeiture.  Thus, while some might question whether the fees Scruggs received from the tobacco litigation were fair, that money is not directly at risk in a forfeiture action because there is no claim that I'm aware of regarding bribery or other violations in the conduct of that litigation.  The cost of his defense is another issue, and his attorney, John Keker, was viewed by Barry Bonds as being on the expensive side, but then I doubt Scruggs will struggle to pay these costs given the strong reputation of Keker and his firm.  So the short answer is "no" regarding whether the government can seek to forfeit the tobacco fees as part of the current prosecution. (ph)

January 24, 2008 in Corruption | Permalink | Comments (0) | TrackBack (1)